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Douglas Brooks

 
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  • Mr. Stiritz' Passion For Shake Mix Costs POST Shareholders [View article]
    I had a different take on the irony of Herbalife's press release regarding sun block. It relates to a famous statement by Justice Louis Brandeis that "Sunlight is said to be the best of disinfectants;" this was from a 1913 article he wrote for Harpers Weekly about the need for better disclosures in the securities industry (this was long before the formation of the SEC). We could use a little sunlight on Herbalife. How about disclosure of the attrition rates of distributors and "members" at each level of the Herbalife compensation plan? Or disclosure of the actual net earnings or losses of Herbalife distributors at each level of the compensation plan? Or the percentage of Herbalife products that are profitably sold to consumers who are not participants in Herbalife? Instead we get a silly press release about the need to use sun block, pumping a Herbalife product which would be a poor substitute for any of dozens of similar products easily available at thousands of pharmacies across the country.

    The first two sentences of the Brandeis article are as follows:

    "Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman. And publicity has already played an important part in the struggle against the Money Trust."
    Nov 25, 2014. 11:48 AM | 14 Likes Like |Link to Comment
  • Can The FTC Manage MLM Fraud? [View article]
    This article is a superb overview of the current, unacceptable state of affairs concerning the regulatory approach to MLM. Today, a consumer who is presented with an MLM "business opportunity" has no means of determining whether that opportunity is a pyramid scheme or a legitimate MLM (I resisted the temptation to put the word "legitimate" in quotes ... oops). This is due to a combination of two factors: First, unlike with franchising or every other type of business opportunity, there is no federally mandated disclosure rule applicable to MLMs. Second, the current definition of "pyramid scheme" focuses on the extent of bona fide retail sales, which no MLM firm tracks or discloses, and therefore can only be determined with the assistance of a subpoena and the substantial resources and expertise required to collect and analyze the data.
    Both problems are solvable. The FTC justified its decision to exempt MLM from the Business Opportunity Rule by stating that the mandated disclosures would not assist consumers in distinguishing between pyramid schemes and legitimate MLMs. This was a red herring. The purpose of the BOR is to provide crucial information to consumers who are attempting to assess a prospective business opportunity. Whether the opportunity meets someone's criteria for what constitutes a pyramid scheme is besides the point. If MLM provides a legitimate business opportunity then the original BOR, which would have required MLM firms to make basic disclosures concerning earnings claims and the background of promoters, as well as a brief "cooling off" period before an investment is made, would not have been the death blow that the industry and its lobbyists portrayed it to be.
    As to defining pyramid schemes, I would advocate a return to the bright line rules of Koscot and Holiday Magic, under which no commission could be paid to an upline distributor unless it was based on a fully consummated retail sale by a downline distributor, and no MLM firm could require a payment as a condition to receiving commissions, whether disguised in the form of inventory purchase requirements (e.g., Herbalife's personal and group volume qualifications) or otherwise. The Amway "retail sales rules," which were approved by the FTC based on flawed analysis and inadequate fact-finding, have proven to be a failure. A more detailed discussion of these points is available here: http://seekingalpha.co...
    Nov 18, 2014. 09:00 AM | 5 Likes Like |Link to Comment
  • Are Herbalife Members Really Just Discount Buyers? [View article]
    Thanks for a thoughtful analysis. Herbalife has never explained why it stopped using the terminology for non-sales leaders after 2010, but it appears that these designations were merely arbitrary. That is, ALL participants at the 25% discount level were called "discount buyers," ALL participants at the 35% level were "small retailers" and ALL participants at the 42% level were "potential supervisors." For a discussion of how the use of such conventional business terms by Herbalife is deceptive, see Robert Fitzpatrick's latest article on the subject: http://seekingalpha.co...
    The real problem with using Herbalife's terminology is that it obscures the fact that these are not static groups of distributors. In fact, the lower levels of Herbalife's distributor/member groups are constantly churning masses, some of whom are rising in the ranks but the vast majority of which will drop out within a year or two. Some of last month's "discount buyers" will be some of next month's "small retailers," and so on, with most destined to become former participants. Herbalife no longer discloses the attrition rates of its non-Supervisor "members" but the last time it did - in 2005 - the rate was over 90% a year. In contrast, Morningstar reports that the renewal rates for Costco members - true "discount buyers" - are in the mid to high 80%. Herbalife either does a lousy job of retaining its discount buyers, or these folks really aren't discount buyers at all, but are hopeful business persons, doomed to failure.
    Sep 17, 2014. 10:24 AM | 7 Likes Like |Link to Comment
  • Confessions Of A Former Herbalife Distributor: Ousted For Success [View article]
    Matt - Congratulations on a great story. This is your best yet.
    Sep 5, 2014. 08:17 AM | 31 Likes Like |Link to Comment
  • Can This MLM Be Saved? [View article]
    Great idea, Bill. At first I thought the show would not succeed because the result would always be the same ("yes folks, another pyramid scheme - and all the contestants lose again!"). But then I remembered HGTV's "House Hunters" which has lasted for years even though the plot is always the same (couple looks for house, couple buys house, lives happily ever after). I'll invest in your project, where do I sign?
    Aug 20, 2014. 09:51 AM | 4 Likes Like |Link to Comment
  • Herbalife: What The FTC Has To Work With [View article]
    Rogier - Another excellent article. I agree (and have been arguing for decades) that deceptive earnings claims are one of the many serious problems with MLM, and that the FTC should never have exempted MLM programs from the Business Opportunity Rule. But I have to point out that the current incarnation of the Biz Op Rule is seriously flawed, in that sellers of a Biz Op can check off a box on the disclosure form indicating that they do not make earnings claims. Of course, business opportunities are always sold with earnings claims, so the check off box will simply force the seller to use proxies (like the high level "independent" Herbalife distributors who operate lead generation systems) to make the necessary deceptive earnings claims.

    On the plus side, the Biz Op Rule does impose a 7-day cooling off period. I think it is very telling that many of the MLM opponents of the rule complained most bitterly about how a cooling off period would adversely affect their recruitment efforts. If you are really interested in recruiting an effective, committed sales force, a seven day cooling off period is not a serious obstacle.

    While disclosure and a cooling off period are essential, they won't solve the problem. There needs to be a serious effort to address MLM compensation plans which reward recruitment at the expense of retailing. My modest proposal is to prohibit the use of any form of purchase qualification for the right to earn commissions or to achieve a higher level in the plan. Such purchase qualifications are almost universally used in MLM compensation plans. But there is no legitimate, functional justification for these requirements. As the 2004 FTC staff advisory explained, "the most common means to achieve this goal [disguising fees paid by distributors to earn commissions] is to require a certain level of monthly purchases to qualify for commissions." In the Herbalife system, for example, this would require elimination of the "personal volume," "group volume," "matching volume" and similar requirements for qualifying to be paid commissions at various levels of the plan.

    Taking this step would not resolve all of the problems you have identified, and which are inevitable with any system that permits infinite recruitment. But eliminating product purchase qualifications for earning MLM commissions would go a long way toward eliminating the perverse incentives that cause the vast majority of MLM participants to lose their investments.
    Aug 5, 2014. 05:21 PM | 3 Likes Like |Link to Comment
  • Blyth's Management Can't Be Trusted: Stock Drops 85%, Yet CEO Makes Millions Via ViSalus [View article]
    I am not an investor in Blyth but I have been a critic of the MLM industry for over 20 years and try to keep up with developments concerning MLM companies. I am curious as to whether you and other investors who follow Blyth are aware that a putative class action on behalf of Visalus distributors was filed against Visalus, Ropart Asset Management, Robert and Todd Goergen and a number of other parties (but not Blyth), alleging that Visalus is a pyramid scheme. Here is a link to a release concerning the lawsuit: http://bit.ly/1rHrkmf
    I do not represent any party to this lawsuit and have no relationship with the lawyers who filed the case, but I do have substantial experience in similar litigation having prosecuted class actions against Herbalife, Nu Skin, Omnitrition and other MLMs.
    Jul 26, 2014. 08:32 AM | 1 Like Like |Link to Comment
  • White Collar Crime Expert Slams Herbalife: An Exclusive Interview With Sam Antar [View article]
    Kudos to QTR and especially to that [expletive deleted] Sam Antar for a pithy analysis of MLM from a unique perspective.
    Jul 14, 2014. 02:50 PM | 9 Likes Like |Link to Comment
  • The History Of The Endless Chain From Commercial Virus To Marketplace Miracle [View article]
    Matt -

    Good suggestions all, but my list would be shorter: (A) Prohibit payment of commissions other than on consummated retail sales. This was the rule in Koscot, and no case - not even Amway - has ever overruled it. Incidentally, enforcing this requirement would eliminate the uncertainty over the status of "internal sales," which was left unresolved by Burnlounge. (B) Eliminate purchase qualifications for earning commissions. In Herbalife, for instance, there are "personal volume," "group volume," "matching volume" and "total volume" requirements for earning various types of commissions and bonuses. If there really is retail demand for an MLM's products, there is no functional justification for such requirements. The effect of purchase qualifications is to create artificial demand for the products. One of the effects of eliminating purchase qualifications would be to eliminate the "breakage" and "roll up" features of MLM compensation plans which tend to enrich the top fraction of 1% of MLM distributors whose incomes are touted at recruitment meetings.
    Of course, none of these suggestions deals with the fundamental problem with endless chains, as Bob so compellingly demonstrates.
    Jun 13, 2014. 05:14 PM | 2 Likes Like |Link to Comment
  • Debunking 'The Retail Question' When An MLM Is An ELM [View article]
    Matt -

    You make a crucial point. In the FTC's Koscot case, which continues to be the leading case on defining pyramid schemes, the FTC recognized that endless chains are deceptive even if products are retailed. Here is a quote from the FTC's opinion:

    "Indeed, even where rewards are based upon sales to consumers, a scheme which represents indiscriminately to all comers that they can recoup their investments by virtue of the product sales of their recruits must end up disappointing those at the bottom who can find no recruits capable of making retail sales." In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1180 (1975), aff’d mem. sub nom., Turner v. FTC, 580 F.2d 701 (D.C. Cir. 1978).

    Ultimately, in Koscot, the FTC decided to permit MLM programs where commissions were only paid on "actually consummated" sales to persons who are not participants. In its 1979 decision in Amway the FTC modified this rule (unfortunately, in my view) and allowed MLM programs to pay commissions on sales to distributors, provided that the program had rules in place (the "Amway rules") which ensured that the products were eventually sold to non-participants. In Webster v. Omnitrition the 9th Circuit Court of Appeals followed both Koscot and Amway, emphasizing that an MLM which purported to follow the Amway rules has to prove that its rules "actually work." Omnitrition also rejected the proposition, which continues to be advanced by MLM proponents, that a distributor's "personal use" satisfies the retail sales requirement. The 9th Circuit stated "If Koscot is to have any teeth, such a sale cannot satisfy the requirement that sales be to "ultimate users" of a product." 79 F.3d 776, 784 (9th Cir. 1996), cert. den., 519 U.S. 865.
    May 1, 2014. 04:59 PM | 3 Likes Like |Link to Comment
  • MLMs, Herbalife, Information Asymmetry, Reporting Regulations, And Not Tom Wolfe [View article]
    Another pithy article from Bill Keep - well done!

    The MLM industry has been very effective at preserving the asymmetry of information that makes a mockery of its pretensions to be the refuge of American entrepreneurial spirit. To take just one example, when, in 2006, the FTC proposed that MLM offerings should be subject to a very modest disclosure rule, MLM firms and the Direct Selling Association mounted a multi-million dollar lobbying campaign, ultimately enlisting 85 Congressmen and women, to procure an exemption for MLM from what ultimately became the FTC's Business Opportunity Rule. The substance of the opposition was that disclosure of basic facts about MLM "business opportunities" along with a cooling off period, would destroy the industry. Asymmetry triumphed.

    To follow up on the comments by David Brear, there is a report by Professor G. Robert Blakey, an expert on federal and state RICO statutes, concerning the parallels between the Amway hierarchy and organized crime which is well worth reading. It is available at http://www.cs.cmu.edu~dst/Amway/blakey_repo... The report suggests at least one answer to Mr. Herbert's question concerning the responsibility of an MLM firm for the conduct of its high level distributors, which is that the pretense of "independent" distributor agreements should not obscure the fact that in most MLM programs there is an intimate relationship between the MLM firm and its high level distributors, with a distinct sharing of roles and responsibilities for the continuous recruiting and churning of the masses of hapless distributors lower in the chain who do not have the slightest chance of success.
    Apr 4, 2014. 03:16 PM | 4 Likes Like |Link to Comment
  • Will The FTC Summon 'The Kraken' To Investigate Herbalife? [View article]
    I don't know how the oral arguments went. From reading the briefs my impression is that the FTC would like the Court to resolve the internal consumption issue, but the Court could affirm the judgment without dealing with it.
    Mar 17, 2014. 01:55 PM | Likes Like |Link to Comment
  • Will The FTC Summon 'The Kraken' To Investigate Herbalife? [View article]
    One interesting aspect of Commissioner Ramirez' response to Senator Markey was her reference to the pending Burnlounge case. The FTC sued the MLM firm Burnlounge in 2007 and won a final injunction in 2012, which Burnlounge appealed. Ramirez noted that the Burnlounge injunction prohibits the defendants from "engaging in any schemes in which compensation for recruitment is unrelated to the sale of products to customer who are not participants." This is a strong signal that the FTC is taking a position diametrically opposed to that of Herbalife and the Direct Selling Association, who maintain that "internal consumption" by distributors should count as "retailing." A ruling by the Ninth Circuit Court of Appeals could resolve this issue. A panel of the Ninth Circuit heard oral arguments in Burnlounge in December. The Ninth Circuit typically decides cases within 3 to 12 months after oral arguments.
    Mar 17, 2014. 12:34 PM | 4 Likes Like |Link to Comment
  • Herbalife Could Damn Well Be The Next MBIA [View article]
    Evaluating arguments by counting footnotes is rather silly. My sources are identified in the text of my article rather than in footnotes. As I discuss in my article, most of Coughlan's assertions are not supported by citations to supporting authorities, whether in her text or footnotes. Your comments concerning retail sales in the context of multi-level marketing are inconsistent with 40 years of pyramid scheme case law. If MLM participants are not making money by retailing products then the only other way they can be making money is by recruiting, which is the sine qua non of a pyramid scheme.
    Nov 29, 2013. 08:16 AM | Likes Like |Link to Comment
  • Herbalife Could Damn Well Be The Next MBIA [View article]
    I analyzed Coughlan's articles here: http://seekingalpha.co...
    Nov 27, 2013. 07:44 AM | Likes Like |Link to Comment
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